As a small registered investment advisor, we are strongly opposed to proposed rule no. IA-2876. While we support the Commissions effort to increase regulation on the financial industry, this rule would not provide greater protections to consumers and would cause an undue burden on small investment advisors. The Ponzi schemes and other financial industry fraud that has come to light in the past year are unquestionably troubling. However, they did not involve the deduction of fees from client accounts. This regulation seems to be an attempt to pacify an angry public over, but misses the point of the actual problem, which could have been prevented by stricter enforcement of the current rules and more scrutiny of true custodians. Investment advisors who have the ability to deduct fees should remain an exception to the rule on having custody of client accounts.

In addition to being misplaced regulation, proposed rule IA-2876 would be prohibitively expensive for small firms and unfairly place them at a disadvantage to larger firms, who coincidentally have been the ones with the most problems. The proposed surprised audits are estimated to cost $10,000 - $20,000, an added expense that many small firms would not be able to absorb. The cost of maintaining a robust compliance program has sky-rocketed in the past five years already. This added expense, or the expense of the alternative, waiting for a check in a bear market, would probably have to be passed onto clients.

Finally, a surprise audit is unlikely to solve the problem of fraud. An auditor, paid by the investment advisor, may not always have the same interests as the SEC. If the purpose of this rulemaking is to protect consumers from financial industry fraud, the SEC should be hiring and training more staff to be examining advisors, custodians, and other financial service providers. It is not appropriate for this oversight to be passed onto investment advisors themselves.

The Commission should not pass the rule as it stands. In the least it should create a custody exemption for advisors who deduct fees from client accounts held with an independent custodian.